4 Reasons You Could Be Denied a Mortgage Loan -- and What to Do if It Happens

Being denied a mortgage loan can be really frustrating. You may have been excited about the idea of buying a house. But you won't be able to move forward if the bank says you can't borrow to pay for it.

Your mortgage lender should tell you why you were not approved for a loan. But there are some common reasons you should be aware of. Here are some reasons you may be denied a home loan by a lender -- as well as some tips on what you should do if this happens to you.

You have a low credit score

A low credit score is a leading reason why you might be denied a loan for a home. Typically, to qualify for a conventional loan (one without a government guarantee), your credit score would have to be about 620. If your score is below that, you could be denied.

If bad credit is the reason for your problems finding a loan, your options include:

• Considering a different lender: Some lenders have more flexible underwriting policies or cater to borrowers with bad credit. Just pay attention to loan terms and fees so you don't get a mortgage that's too expensive.
• Considering a government-backed loan: With an FHA loan, for example, you may be eligible to borrow for a house with a score as low as 500.
• Getting a cosigner: If a borrower with better credit is willing to pledge to your lender that they'll share the legal responsibility for loan payback, you may be able to get approved with their help.

You have too much debt

If you have a debt-to-income ratio of more than 36% (which means your total debt payments including your new mortgage exceeds 36% of your income), then you could be denied a home loan.

In this situation, your options include:

• Switching loan types: Some loans allow for a larger debt-to-income ratio. Again, FHA loans could be an option, as you may sometimes be approved to borrow with a debt-to-income ratio of 43% or even higher with compensating factors.
• Paying down debt: If you can reduce what you owe, you'll fix your debt-to-income ratio issue.
• Choosing a less expensive house: Your new home payments are factored into your debt-to-income ratio calculation so if you get a lower-cost mortgage, you may be able to get approved.

Your income isn't stable enough

Unstable income is another issue that could lead to a mortgage denial. For example, if you recently changed careers or your income wildly fluctuates from one year to the next, this can make lenders nervous.

You have few options here, other than waiting to apply for a loan until you have a solid job history showing two years of the same income (and ideally in the same job). You also could apply for a loan you can afford even at your lowest income level, or could get a cosigner with a more stable income.

The house didn't appraise for enough

Finally, the last problem could be if your house doesn't appraise for enough. See, mortgage lenders only allow you to borrow a certain percentage of a home's value, and if your house appraises low, it could mess up the loan-to-value calculation.

Say, for example, you offered to pay $400,000 for a house and you were making a 10% down payment because your lender is only willing to loan you 90% of what the home is worth. If the house appraised for $300,000 instead of $400,000, the $40,000 down payment you'd been planning to make would leave you borrowing $360,000 for a house valued at $300,000 -- and no lender would approve this loan.

In this situation, you'd either have to renegotiate the price of the home, walk away from the deal, or put enough money down to meet your lender's loan-to-value requirements (so you'd only be able to borrow $270,000 and would have to pay for the rest of the house in cash.

Ultimately, being denied for a loan is a disappointment but as you can see, you still have borrowing options. Just talk to your lender, find out the issue, and see if any of these solutions will work to help you get the loan you need to buy your dream home after all.